DETROIT, April 11 (Reuters) - A123 Systems Inc has
been given two more years to fully tap a $249 million grant from
the Obama administration to encourage advanced battery
development and create jobs in the United States.

The lithium-ion battery maker now has until December 2014 to
use the U.S. Department of Energy grant earmarked to build an
A123 battery factory in Michigan.

The DOE and A123 agreed to extend the contract last week,
A123 said in a U.S. Securities and Exchange Commission filing on
Wednesday. A123 won the grant in 2009 and had until the end of
this year to tap the grant in full.

"We see this as very positive because it allows us to
continue on our growth path in Michigan," A123 spokesman Dan
Borgasano said.

At the end of 2011, A123 had received $127 million of the
DOE grant, which stipulates that the company must match at least
a portion of the money provided by the U.S. government.
Typically, recipients of these grants are reimbursed for their
expenses on approved projects.

In recent months, a series of setbacks have weakened A123's
financial position and sent its stock tumbling more than 40
percent so far this year.

In March, A123 posted its largest ever quarterly loss, hurt
by a drop in battery orders from its main customer, Fisker
Automotive.

Another blow came when a Fisker Karma plug-in hybrid sports
car with an A123 battery failed during a test by Consumer
Reports magazine. The cause was a manufacturing defect at an
A123 plant. A123 said it would replace the batteries, which
would cost the company $55 million.

President Barack Obama's administration has been a strong
proponent of electric vehicles and set a goal of getting 1
million battery-powered vehicles on the road by 2015.

Both A123 and Fisker received DOE funding as part of this
goal. A123 will make the batteries for General Motors Co's
upcoming all-electric Chevrolet Spark.

But Americans' adoption of electric vehicles faces hurdles,
including high prices and concerns over battery safety. One
person was seriously injured in an explosion at a GM laboratory
Wednesday during a test of lithium-ion batteries for electric
cars not yet in production.

Still, analysts and executives say there will be challenges
in bringing this battery technology to a wide swath of vehicles
because it is new and there is a learning curve.